China Investors Turn Against Hong Kong Stocks in Market Rout

(Bloomberg) -- Chinese investors have gone off Hong Kong stocks again.

After turning net buyers in July, mainland traders have been selling the city’s stocks this month, returning to an April-June trend, when they dumped HK$24 billion ($3 billion) of shares over a record three consecutive months. The reversal came as the Hong Kong benchmark declined every day last week, but investors continued to pull out Monday through Wednesday, when the Hang Seng Index rose 2.5 percent. The gauge added 0.9 percent on Thursday.

“Southbound flow to Hong Kong has been positive since 2016, but the tide started to turn in April,” said Tang Jianzhuo, a Shenzhen-based portfolio manager at E Fund Management Co. “Some mainland capital was forced to pull out due to deleveraging pressure on the mainland, while some chose to sell due to trade concerns and weaker expectations for the economy.”

China Investors Turn Against Hong Kong Stocks in Market Rout

Net sales last week amounted to about HK$7.5 billion, the third biggest weekly total on record, according to Bloomberg calculations based on daily trading data. Another HK$4.5 billion was sold this week. It’s a far cry from January, when the Hang Seng Index soared to a record high and investors piled in via trading links with Shanghai and Shenzhen.

Mainland investors have spent about HK$86 billion buying Hong Kong stocks this year, averaging out at about HK$601 million in net purchases a day. That’s down about 60 percent from 2017.

The waning inflows have exacerbated the Hang Seng Index’s declines this year, Tang said. Stocks in Hong Kong and the mainland have fallen hard this year amid deteriorating trade relations with the U.S., a weaker yuan and signs of slower economy in China, where a deleveraging campaign has hampered growth.

“We think the southbound outflow is also related to profit-taking by mainland investors,” Tang said. “After two years of good performance in Hong Kong, many southbound funds have earned sizable profits.”

Top Sells

Mainland investors have lowered their stakes in 15 out of 50 Hang Seng Index members this year. Tencent Holdings, Ping An Insurance Group and AAC Technologies Holdings are among those experiencing the biggest outflows, according to Bloomberg calculations based on shareholding data from the Hong Kong stock exchange.

“Large caps with good liquidity could bear the brunt of selloffs if investors want to exit,” said Cheng Lv, Shanghai-based analyst at Huatai Securities Co. Heavyweights like banks and technology firms could take a blow when mainland investors cash out, she said.

China Investors Turn Against Hong Kong Stocks in Market Rout

While Chinese investors’ holdings in Hang Seng Index members is near a seven-month low, their exposure to Hang Seng Composite Small Cap Index members remains close to the highest in at least a year, according to Bloomberg data. China Education Group and Gemdale Properties & Investment Corp. are among the most popular stocks in terms of inflows this year.

Onshore investors are keeping a close watch on two areas to decide whether to keep selling: Chinese economic growth indicators and trade talks between China and the U.S., said Wang Menghai, Shanghai-based money manager at Fullgoal Fund Management Co. Wang oversees 7 billion yuan ($1 billion) in assets investing via the trading links.

“If the trade solutions or economic growth turn out to be better than expected, funds would flow to Hong Kong,” Wang said. “If the trade tensions escalate, or there are bad signs for the economy, investors may not have much motivation to buy Hong Kong stocks in the near-term.”

Wang said he is avoiding sectors closely related to the trade tension between China and the U.S. and allocating to companies with abundant free cash flow, as they are more resilient during volatile times. He also favors companies with low gearing, given deleveraging measures being taken on the mainland.